The Government Benefits Bubble
The New York times recently noted that “Economy Faces a Jolt as Benefit Checks Run Out.”
Close to $2 of every $10 that went into Americans’ wallets last year were payments like jobless benefits, food stamps, Social Security and disability, according to an analysis by Moody’s Analytics…
By the end of this year, however, many of those dollars are going to disappear, with the expiration of extended benefits intended to help people cope with the lingering effects of the recession.
When this happens, it will be just the latest bubble to pop.
As far back as 2008, Peter Schiff and other Austrian-minded observers contended that with the various stimulus packages, the feds were just blowing up a government benefits bubble to replace the real estate bubble, which had in turn replaced the dot-com bubble.
The government benefits bubble can’t be maintained forever, so once the stimulus runs out, and as unemployment insurance runs out for millions of unemployed workers, that bubble will burst too, and spending, consumer confidence, and demand for purchasing real estate will fall again.
The NYT piece has some interesting statistics on this, and below, I add some more.
Considering the Personal Income Data
The Bureau of Economic Analysis publishes monthly and quarterly data on “personal income and outlays.” These are just estimates, of course, based on a wide variety of sources, and they represent many types of income.
When the press reports on personal income, it sometimes implies that increases in personal income are necessarily driven by increases in employment and wages. This is not necessarily the case. Increases in personal income, as measured by the BEA, can driven by increases in income in the form of social security payments, Medicare, unemployment insurance and other government transfer payments. Indeed, in many areas of the country where unemployment is high, and where the population is old, government transfer payments may be the primary source of income.
The Personal Income reports do provide specific data on wage income versus transfer payments, however, and it is in these numbers that we can see that so much of the recent increases in personal income are due to “transfer receipts” such as unemployment insurance, Medicaid and other government assistance payments.
Looking at the quarterly data, found here, we can see that from the first quarter of 2008 to the first quarter of 2001, personal income overall increased 5 percent in the US. However, if we subtract transfer receipts, we see that income has increased by 0.7 percent. Transfer receipts, on the other hand, increased 30 percent during the same period.
From Jan. 2008 to Jan. 2011, the CPI increased 4.3 percent, so income that is not derived from transfer receipts went down in real terms. In other words, if we don’t count government assistance, we have less income now than we did three years ago.
Looking at these numbers over the last ten years, we see that from the 1st Q 2002 to the 1st Q 2011, personal income increased 44 percent, but when transfer receipts are removed, income increased only 37 percent. At the same time, transfer receipts increased 85 percent.
Over this ten year period, from Jan. 2002 to Jan. 2011, the CPI increased 24 percent. So, relying on this analysis alone, we could say that income did increase somewhat in real terms during this period, but that transfer receipts increased by more than twice as much.
This is a very simple analysis, but it does help to illustrate how significant a role transfer receipts play in the modern American economy. This has been especially true since 2008. It’s safe to say that a healthy portion of consumer spending, which the government prizes so much, is just being financed by the taxpayers and then recycled back into the economy.
Note: Transfer receipts can include some private payments such as liability payments for personal injury, but this is a small part of the overall transfer receipt numbers.